Ivy Funds Emerging Markets Local Currency Debt Fund


Market Sector Update

  • The market was down over the quarter with the majority of weakness attributable to weaker currencies. It was the result of a confluence of negative factors: a collapse in oil prices, concerns over the impact of a 2015 U.S. rate hike with a continued stronger US dollar, a continued slow down in China and the Eurozone and growth below expectations in emerging markets.
  • The Brazilian real was down but partially cushioned by high bond yields. The Brazilian central bank raised its key interest rate to 11.75% to keep a lid on inflation.
  • The Russian central bank dramatically hiked its key interest rate to 17% while foreign reserves fell in efforts to support the currency. The ruble was down and bond prices fell 15% for the quarter.
  • China’s manufacturing sector entered contraction, and the Chinese government unexpectedly cut the lending rate by 40 basis points but ensured that interest paid to savers was protected.

Portfolio Strategy

  • We are selectively taking an underweight position to emerging currencies as it will be hard to see gains in the short term in the face of a stronger U.S. dollar and little improvement in emerging markets data. Positioning will be highly idiosyncratic, with underweights in some markets and overweights in others.
  • We are more positive on Asian currencies as manufacturing and growth has shown more improvements than other emerging market regions. Additionally, most countries should benefit from lower commodity prices apart from Malaysia.
  • Conversely, we remain cautious on the same vulnerable currencies more linked to commodities, sluggish growth and current account deficits.
  • We believe that the current environment may be good for some local-rate markets, such as in Eastern Europe, as a result of support from stimulus in the eurozone. Similarly, we believe the current envionment favors and also in markets where rates may be cut further or yields are attractive and monetary policy is generally on hold.


  • Yields look attractive while the theme of a stronger U.S. dollar means that for emerging market currencies, it will be similar to salmon swimming upstream.
  • For some countries, a weaker currency is part of the solution to stimulate exports and improve current account balances. Though weaker commodity prices will negatively impact commodity exporters such as Russia, Brazil and South Africa, it has already had a positive impact on manufacturers such as India and Turkey. With growth remaining challenged in many emerging markets and inflation under less pressure, there is the potential for yield compression making bonds attractive.
  • The potential for a rate hike in the U.S. this year makes spread assets classes less attractive versus emerging local currency debt, where currencies are two standard deviations below their historic equilibrium level.
  • Notwithstanding the short-term challenges, we believe the asset class remains one of the most attractive areas within fixed income over the longterm, given the transition to more normalized global monetary policy.


The opinions expressed in this commentary are those of the Fund manager and are current through December 31, 2014. The manager’s’ views are subject to change at any time based on market and other conditions, and no forecasts can be guaranteed. Past performance is no guarantee of future results.

Risk factors. As with any mutual fund, the value of a fund’s shares will change, and you could lose money on your investment. An investment in a fund is not a bank deposit and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. International investing involves additional risks, including currency fluctuations, political or economic conditions affecting the foreign country, and differences in accounting standards and foreign regulations. These risks are magnified in emerging markets. These risks are more fully described in fund prospectuses. Fixed income securities are subject to interest rate risk and, as such, the net asset value of the fund may fall as interest rates rise, especially securities with longer maturities. Investing in below investment grade securities may carry a greater risk of nonpayment of interest or principal than higher-rated bonds. The Fund may seek to manage exposure to various foreign currencies, which may involve additional risks. The value of securities, as measured in U.S. dollars, may be unfavorably affected by changes in foreign currency exchange rates or exchange control regulations. Investing in foreign securities involves a number of risks that may not be associated with the U.S. markets and that could affect the Fund’s performance unfavorably, such as greater price volatility; comparatively weak supervision and regulation of securities exchanges, fluctuation in foreign currency exchange rates and related conversion costs, adverse foreign tax consequences, or different and/ or less stringent financial reporting standards. Sovereign debt instruments are also subject to the risk that a government or agency issuing the debt may be unable to pay interest and/or principal due to cash flow problems, insufficient foreign currency reserves or political concerns. Risks of credit-linked notes include those risks associated with the underlying reference obligation, including but not limited to market risk, interest rate risk, credit risk, default risk and foreign currency risk. The buyer of a credit-linked note assumes the risk of default by the issuer and the underlying reference asset or entity. If the underlying investment defaults, the payments and principal received by the Fund will be reduced or eliminated. Also, in the event the issuer defaults or there is a credit event that relates to the reference asset, the recovery rate generally is less than the Fund’s initial investment, and the Fund may lose money. The use of derivatives presents several risks including the risk that fluctuation in the values of the derivatives may not correlate perfectly with the overall securities markets or with the underlying asset from which the derivative’s value is derived. Moreover, some derivatives are more sensitive to interest rate changes and market fluctuations than others, and the risk of loss may be greater than if the derivative technique(s) had not been used. Derivatives also may be subject to counterparty risk, which includes the risk that a loss may be sustained by the Fund as a result of the insolvency or bankruptcy of, or other non-compliance by, another party to the transaction. These and other risks are more fully described in the fund’s prospectus.

Investors should consider the investment objectives, risks, charges and expenses of a fund carefully before investing. For a prospectus, or if available a summary prospectus, containing this and other information for the Ivy Funds, call your financial advisor or visit us online at www.ivyfunds.com. Please read the prospectus or summary prospectus carefully before investing.